Reports of ESG’s fall from grace have been greatly exaggerated. Despite the ongoing media storm spurred by corporate ESG scale backs and political discourse, ESG and sustainability are forecasted to remain crucial factors in the investment landscape for the foreseeable future.
Bloomberg anticipates global ESG assets will surpass $40trn by 2030, representing over 25% of all assets under management. Meanwhile, investor appetite for ESG and sustainability funds appears to remain healthy, particularly in the UK and Europe.
As firms and businesses work to determine how to approach ESG and sustainability, it’s become increasingly apparent that a clearly defined, and fully integrated ESG investing strategy is the key to responsible and profitable ESG investing strategy.
More often than not, portfolio managers had been happy to trek down the exclusionary path, ruling out from the get-go any companies, industries or sectors that do not align with their concept of ESG and sustainability. It was a safe position to take – but not necessarily the most profitable.
Now, as ESG comes under fire from cost-cutting boards, they must fully embed ESG risks and considerations within their overall investing strategy.
The exclusionary approach certainly has its benefits – particularly if you have a client with pre-defined investing parameters. Ultimately, however, it fails to keep pace with a more integrated approach to ESG and sustainability and can easily leave firms blinded to opportunities in industries and companies they have otherwise shunned. While it can be an ideal jumping-off point for investment decisions, the exclusionary approach should not define your overall investment strategy.
Positive ESG strategies don’t take exclusion-only approaches. Instead, they opt for a more integrated approach by placing ESG and sustainability factors alongside typical investment and asset management considerations. It’s a strategic decision that opens them up to a host of potential ESG-driven benefits.
From an operational point of view, by fully embedding ESG and sustainability values into the fabric of their firm, portfolio managers set themselves up to better adapt to the continually evolving regulatory landscape of ESG.
As rules and reporting frameworks continue to change, firms are left grappling to keep up with legal requirements and regulatory demands. By ensuring they have a clear set of ESG and sustainability values which are understood and adhered to across all levels of the firm, wealth and portfolio managers will find themselves better prepared to adhere to new ESG regulations.
Embedding ESG and sustainability values within the foundations of their overall investing strategy will provide firms with an approach that is both clearly defined and adaptive, making it simpler to remain in line with ESG requirements.
Beyond operational considerations, ESG and sustainability holds the potential for stronger investment results in both the near future and further down the line.
Fully integrating ESG and sustainability with a firm’s overall investment strategy will provide wealth managers with clearer overview of potential ESG-related risks. Whether this might be an immediate risk or a factor to keep in mind as societal attitudes change, by integrating ESG and sustainability considerations within their overarching investment approach, ESG considerations become a natural step in the risk-analysis process – setting investments up for greater chances of success.
On the other side of the coin, wealth managers are able to strategically identify companies successfully leading the charge in the ESG and sustainability remit – creating greater opportunities for value creation.
Instead of immediately bypassing certain companies, firms analyse the ESG and sustainability qualities of each business. They’re then able to make the decision whether to invest in businesses with a clear ESG and sustainability plan or which are making a significant positive impact.
As firms strive to implement an overarching ESG and sustainability approach, ESG reporting regulations stand as an ideal initial investment framework, which can then be adapted to incorporate firms’ own ESG and sustainability values.
Once the desired ESG and sustainability approach is defined, it can then be tailored based on the industries, companies and asset areas the firm deals with. There can be no one-size-fits-all approach to ESG investing. Successful responsible investment strategies will see each investment decision made on a case-by-case basis, taking into account all relevant factors, such as industry standards and targets and recent market trends.
An integrated ESG investment strategy doesn’t have to forgo aspects of the exclusionary approach. Many managers and advisors will find they have clients with specific views and strongly held beliefs, so having the ability to exclude certain fields is crucial. A hybrid approach – combining aspects of both the exclusion and integration strategies – may be the ideal stance for some firms to take.
The most successful responsible investment strategies will be those that seek to integrate and embed ESG and sustainability values to at least some degree. They will be the ones to reap the full benefits of ESG and sustainability investing, spotting the opportunities that others miss.
Wealth managers should seek to transition ESG and sustainability into an everyday part of the investment process. By becoming second nature, firms will no longer seek out specific ESG and sustainability investment opportunities. Instead, they will naturally ensure that any and all investment opportunities align with their ESG and sustainability values – thus opening their investment strategy up to more opportunities for success.
As ESG and sustainability continue to cement their place in the corporate and financial world, it’s time wealth managers consider taking an integrated approach to their ESG and sustainability investment strategy.
